When investors consider the benefits of investing in stocks, they usually consider only the basic level of capital gains and dividend payments. After all, this is what’s mostly covered in the mainstream financial media and talked about at the proverbial cocktail parties where people brag about their dividend yield or how much their stock just went up.
However, there is a less common third option that allows investors to grow their capital more efficiently while benefiting from a more efficient tax structure. This method is not often discussed in the media or social networks because most investors do not fully understand its benefits. Stock buybacks are a hidden gem of wealth accumulation that Warren Buffett is a big fan of in his own company.
This is why investors will see through stocks like Berkshire Hathaway Inc. New York Stock Exchange: BRK.B, AutoZone Inc. New York Stock Exchange: ASOand even Domino’s Pizza Inc. New York Stock Exchange: DPZ The real benefits of owning shares in a company that actively repurchases its shares rather than paying dividends to its shareholders. But before we get to that, here’s why buybacks are better than dividends.
Share buybacks or dividends: which is better?
Well, it depends. If an investor has already accumulated enough wealth that receiving dividends makes more sense, then of course dividends benefit. However, most investors are in the market to see their wealth grow, and this is where stock buybacks are critical.
First, they are tax friendly. When companies pay dividends, they do so from capital that has already been taxed, and then investors have to pay double tax on that income. The implication is that this capital leaves the company, indirectly reducing enterprise value and profit potential where that capital should be invested.
The buyback is taxed only once. They preserve capital within the company and therefore its value. They also generate profits using the company’s benchmark return on invested capital (ROIC). To grow wealth, choose buybacks instead of dividends.
Warren Buffett’s Berkshire Hathaway: A Prime Example
Berkshire Hathaway today
(As of 12/27/2024 5:45 PM ET)
- 52 week range
- $355.31
▼
$491.67
- P/E ratio
- 9.22
- Target price
- $457.50
As big as Berkshire Hathaway is in the financial sector, with a market cap of nearly $1 trillion, it doesn’t pay a dividend. Warren Buffett has stated that if he were ever forced to return excess cash to shareholders, he would do so by repurchasing Berkshire shares at valuations that he believes are below intrinsic value; otherwise, that money would go into Treasury bonds.
The effect can be immediately seen in the stock performance. The S&P 500 has risen 367% since 2000, while Berkshire Hathaway has more than doubled that figure to 766%, all thanks to holding mostly low-beta stocks that should theoretically outperform. level or slightly below the S&P 500.
So why the superiority? According to the company’s financial reports, the share buyback allowed capital to remain within the company and increase the return on investment to 15.2%. That’s nearly double the S&P 500’s 8% average annual return, which makes sense if Berkshire doubles the index’s performance.
AutoZone Stock Chart Makes Case for a Buyback
AutoZone Today
(As of 12/27/2024 5:30 PM ET)
- 52 week range
- US$2510.00
▼
$3416.71
- P/E ratio
- 21.66
- Target price
- US$3384.89
Here’s an interesting way to look at stock buybacks and their benefits: While the S&P 500 is up 367% since 2000, AutoZone stock has delivered a massive 12,270% return to shareholders. Here’s how stocks did it and how investors can use this information to find their next wealth boost.
By consistently repurchasing shares, AutoZone has contributed millions of dollars of capital to its ROI, which reached 39.7% as of the last 12 months. This means the stock is rising on its own like no other stock in its peer group or market, which explains the significant outperformance seen in the chart.
Moreover, analysts still believe that the company can achieve higher prices despite massive sales volumes; Citigroup confirmed that AutoZone shares are a Buy as of December 2024, setting a $3,900 price target for the stock, suggesting upside potential of up to 16% from today’s prices.
Domino’s Pizza: Buffett’s combination of purchases and buybacks
Domino Pizza today
Domino’s Pizza
(As of 12/27/2024 5:45 PM ET)
- 52 week range
- $395.08
▼
$542.75
- Dividend yield
- 1.41%
- P/E ratio
- 26.39
- Target price
- $495.76
Recent 13-F filings show that Warren Buffett initiated a position in Domino’s Pizza stock, another example for investors that reinforces the fact that companies that buy back stock tend to attract better capital. Again, since its IPO in 2005, Domino’s Pizza shares have risen 3,470%, increasing the return of the S&P 500 tenfold.
This can be attributed to the company’s consistent buyback programs, which provide the company with an ROI of over 61% as of the last 12 months. This is probably why Buffett was so eager to buy something for his company. From what some analysts are seeing, the compounding effect has spread to Wall Street.
Members of Loop Capital now have a Buy rating on Domino’s Pizza shares, up from previously holding a Hold rating, this time also setting a $559 price target for the company, implying a 23.3% upside from where it stood. where it is trading today.
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